"Market Drivers: Key Factors to Watch in the Final Five Months of the Year"

What's Driving the Remarkable Stock Market Rally?

The Soft Landing Story

The stock market rally has been driven by the concept of a soft landing. This means lower inflation, slower but strong job growth, and a stabilization in interest rates. Inflation has decreased on both headline and core measures, allowing for a more stable economic environment. Job strength remains strong, although not as high as the previous year. The unemployment rate has stayed in the 3.5% range, providing stability. Interest rates have remained relatively consistent throughout the year, with the market reacting negatively when they exceeded 4%. The soft landing has allowed earnings estimates to stabilize and investors are hopeful that earnings will start to grow.

Valuations and Seasonal Weakness

While many are optimistic about the stock market rally, there are concerns about high valuations and the upcoming seasonal weakness. Valuations have increased, but earnings have not seen the same growth in every sector. Some sectors have experienced little multiple expansion. August and September historically tend to be weak months for the market. Additionally, there is a belief that the momentum of the rally cannot be sustained. However, strong up markets have shown that stocks can remain high for longer than expected. Market participation has not decreased, indicating that there is still potential for further gains.

The Drivers for the Rest of the Year

To sustain the stock market rally, two primary factors need to be present: a ramp-up in earnings and continued data supporting the soft landing. Earnings growth is crucial for the next phase of the rally. Consensus estimates predict double-digit earnings growth next year. The second quarter of this year is expected to be the low point for earnings, with growth projected for the rest of 2023 and into 2024. Analysts have been revising estimates upward, indicating optimism in earnings growth. The soft landing scenario relies on economic data, particularly inflation, remaining low. However, high interest rates could pose a challenge to further market advancement. If interest rates continue to rise and the upcoming jobs report exceeds expectations, the market may pause in August.

Remaining Cautious

Investors are advised to exercise caution as the stock market rally continues. While the market has seen significant gains, valuations are high, and interest rates are nearing multi-year highs. Trying to squeeze every last penny out of the rally may not be prudent. It is important to consider the market's high valuation and potential risks before making further investment decisions.

Conclusion: How the Stock Market Rally Impacts New Businesses

The remarkable stock market rally driven by the concept of a soft landing, lower inflation, and stable job growth can have significant implications for new businesses. While the current market conditions may seem favorable with a potential for further gains, it is crucial for new businesses to navigate these trends with caution and consider the potential impact on their operations. The soft landing scenario, characterized by lower inflation, stable interest rates, and solid job growth, can provide a conducive environment for new businesses. Lower inflation means reduced costs and more pricing stability, allowing startups to plan their finances more effectively. Stable interest rates also provide businesses with a predictable borrowing landscape, potentially easing access to capital for expansion or investment. Moreover, the positive market sentiment arising from the stock market rally can contribute to increased investor confidence and willingness to support new ventures. This can open up opportunities for fundraising and capitalizing on the optimistic market sentiment. However, caution is still advised. While the stock market rally has seen significant gains, high valuations and nearing multi-year highs in interest rates present potential risks. New businesses need to carefully assess the market's valuation and evaluate the potential challenges that may arise should interest rates continue to rise. Additionally, a potential seasonal weakness during August and September, historically observed in the market, should be taken into account. In conclusion, new businesses should closely monitor the stock market rally's impact on valuations, interest rates, and market sentiment. By maintaining a cautious approach and considering the market's potential risks, new businesses can strategically position themselves to leverage the favorable aspects of the rally while mitigating any potential downsides. Article First Published at: https://www.cnbc.com/2023/07/31/these-factors-will-be-big-market-drivers-in-the-final-five-months-of-the-year.html